Full Joy Foods Pty Ltd v Australian Dairy Park Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
ARBITRATION LIST

S ECI 2020 01942

FULL JOY FOODS PTY LTD (ACN 159 805 857)	Applicant
v
AUSTRALIAN DAIRY PARK PTY LTD (ACN 162 478 373)	Respondent

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JUDGE:	NIALL JA
WHERE HELD:	Melbourne
DATE OF HEARING:	6 October 2020
DATE OF JUDGMENT:	13 October 2020
CASE MAY BE CITED AS:	Full Joy Foods Pty Ltd v Australian Dairy Park Pty Ltd
MEDIUM NEUTRAL CITATION:	[2020] VSC 672

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ARBITRATION – Application to set aside domestic award – Commercial Arbitration Act 2011 ss 34(2)(a)(ii) and 34(2)(b)(ii) – Whether applicant was ‘unable to present its case’ because arbitrator made award on basis of claims and evidence not pleaded or argued – Whether award should be set aside on ‘public policy’ ground – Procedural fairness – Natural justice – TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361 applied – Applicant afforded reasonable opportunity to present its case – Award not contrary to public policy – Proceeding dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Applicant:	Ms G Costello SC with Ms E Levine	FCG Legal Pty Ltd
For the Respondent:	Mr P Wallis SC with Mr A Burnett	Henley Legal

HIS HONOUR:

The genesis of the proceeding in this Court is a dispute over the performance of an agreement for the supply of infant milk products into China. Pursuant to the agreement, the dispute was resolved by arbitration, which was governed by the Commercial Arbitration Act 2011 (the ‘Act’). The applicant, the purchaser under the agreement,[1] alleged that the product that was supplied, and which it had paid for, did not meet the applicable Chinese import standards, was not fit for human consumption and was not delivered under the contract. The arbitrator rejected each of those claims in an award dated 10 March 2020 (the ‘Award’). The applicant now alleges that the arbitrator denied it a proper opportunity to present its case because the arbitrator relied on a matter that was not properly put in issue and on which the applicant did not have a reasonable opportunity to address the arbitrator. For the same reasons, the Award was said to be against the public policy of the State. The applicant seeks an order setting aside the Award pursuant to ss 34(2)(a)(ii) and 34(2)(b)(ii) of the Act.
[1]The purchaser specified in the agreement is Sino Longrun Pty Ltd, which is a former name of the applicant, Full Joy Foods Pty Ltd.

The proceeding in this Court is not concerned with the correctness of the arbitrator’s conclusions on the contract claims, only with the question whether the arbitrator denied a reasonable opportunity to the applicant to present its case. However, it will be necessary to set out the issues in dispute in the arbitration and the course that it took.

For the reasons that follow, the proceeding must be dismissed.

The facts

By an agreement dated 27 March 2017 (the ‘Sales Agreement’), the applicant agreed to buy, and the respondent agreed to manufacture and supply, three kinds of infant milk products for consumers of different ages. They were ‘infant formula’ for babies up to 6 months; ‘follow-on formula’ for infants between 6 and 12 months of age; and ‘growing-up formula’ for infants older than one year of age. The parties described these variants as step 1, step 2 and step 3 products or powders. All of the products were presented under the ‘Royal Warton Gold’ brand.

The Sales Agreement related to the purchase of the ‘under-mentioned products’ set out in a table. The table provided for a specified quantity of each kind of formula and comprised a total of 34,560 cans or sachets at a total cost of USD $311,040. I note that in the table the headings for unit price and amount refer to ‘Unit Price (CIF USD)’ and ‘Amount (CIF USD)’. Although the Sales Agreement provided for a total of 34,560 cans, further orders were made by sales orders and invoices, and reflected in a consolidated sales order and invoice in June 2017. Ultimately, the applicant purchased the following quantities:[2]
[2]There is a minor discrepancy between the total quantity of cans pleaded and the total numbers in the consolidated sales order and invoice. Nothing turns on this.

(a) 11,040 cans of ‘Royal Warton’ infant formula (‘step 1’);

(b) 8,400 cans of Royal Warton follow on formula (‘step 2); and

(c) 32,400 cans of Royal Warton growing up formula (‘step 3’).

The critical clauses of the Sales Agreement are as follows:

3. SHIPMENT
After signing the contract and 50% deposit has been paid, production can then be completed as follows:
3.1Four months after confirmation that the label has been approved by ADP and buyer (English version does not need CIQ approval if not exporting to China) along with the artwork approved by the printer.
3.2The loading of the container can commence once the 3rd party testing and ADP QC approval reports have been received along with the balance of the invoice being paid.

4. PAYMENT
4.1 50% deposit of the total of the commercial invoice is USD 155520.00 to be paid within three days upon the signing of the contract.
4.2The buyer needs to pay the 50% balance USD 155520.00 of payment within two days after the health certificate and booking confirmation of vessel are issued.
4.3Interest and costs
Without in any way limiting ADP’s right to require payment in full on the due date, ADP may, in its sole discretion, charge interest at the annual rate of 4% on overdue accounts on the balance of the amount owing.
[Seller’s USD bank account details]

5. OBLIGATIONS
5.1 No Deposit refunds
The buyer acknowledges and agrees that the manufacturer will use all of the Deposit to purchase materials from third party suppliers to enable the manufacturer to manufacture the Products and that those third party suppliers will not grant refunds to ADP. Accordingly, if the buyer does not pay the balance of the Price in full for an order, ADP will not refund the relevant Deposit to the buyer.
5.2The seller is responsible for the manufacture of the products and product quality; the seller will be responsible for shipment from ADP to Tianjin Port according to CIF, but the buyer will take charge the cost of health certificate and certificate of origin.
5.3The testing fees must be paid by the buyer except the microbiology testing fees in Australia.

…
5.8The Seller will ensure that the Products supplied to the Purchaser will conform to Import country standards, and be fit for human consumption.
5.9The corporation and agreement between Seller (ADP) and Buyer (Sino Longrun) are based on the condition that the Seller (Australian Dairy Park Pty Ltd) must have been approved by Certification and Accreditation Administration of the People’s Republic of China. If ADP fails, ADP will refund unused deposit, but ADP will not refund to the buyer for the purchased raw materials and cans.

8 FORCE MAJEURE
8.1The seller is not liable for a failure to perform any of his obligations if he proves that the failure was due to an incident(s) beyond his control, and that he could not reasonably be expected to have taken the incident(s) into account at the time of the writing of the contract or to have avoided or overcome its consequences.
8.2The seller shall not be responsible for the delay of shipment or non-shipment in the following events of Force Majeure, including fires, floods, earthquakes, tempests, war, strikes and blockade.
8.3If a party fails to perform a contract owing to force majeure, it shall inform the other party promptly, so as to reduce the possible damages inflicted on the other party, and shall also provide a certificate of non-performance owing to force majeure within reasonable time. Both parties shall, through consultations, decide whether to terminate the contract or to exempt the part of obligations for implementation of the contract or whether to delay the execution of the contract according to the effects of the events of Force Majeure on the performance of the contract.

Clause 9 of the Sales Agreement provided for arbitration of disputes at an agreed location in Victoria. The Sales Agreement concluded with the statement:

The contract shall be interpreted in accordance with the current court of Victoria.

In circumstances to which I shall later refer, the consignment was sent from Melbourne to Tianjin Port in China by sea. Before it left, the respondent had the product tested and obtained the necessary documentation for export. Those tests showed the product to be compliant with Chinese import controls and, in particular, the standard that prohibited the presence, at any level, of the bacteria enterobacter sakazakii (‘ES’), in the step 1 product.

The applicant paid the purchase price in full before the goods departed Australia.

The product arrived in China in July 2017. According to a test conducted by Chinese authorities, ES was detected in a sample of the step 1 product. As foreshadowed above, a Chinese import standard (GB 10765-2010) applied to infant formula and therefore covered the step 1 product but not the step 2 or step 3 product. The relevant standard was zero per 100 grams (‘0/100g’). In other words, the presence of ES, to any level, would mean that the product did not meet the relevant import standard.

Although the import standard only applied to the step 1 product, the Chinese authorities did not permit any of the consigned products to pass customs and enter China for consumption. After a stand-off, the shipment was returned to Australia and ended up as animal feed.

Subsequently, in September/October 2017, the respondent, at its cost, manufactured and despatched a replacement batch of the step 1 product to China. It entered China without incident. The respondent also offered to reship the original batches of step 2 and step 3 product but, by 25 October 2017, the applicant had informed the respondent that it would not accept delivery of any further batches, and instead demanded the return of the purchase price that it had paid for the step 2 and step 3 product. I note that there is some suggestion in the material that the respondent also offered to manufacture a fresh batch of step 2 and 3 product. It is not necessary to address this further.

The applicant claimed that the respondent failed to deliver the product in accordance with the Sales Agreement and that the product it supplied did not meet Chinese import standards and was not fit for human consumption. It sought damages of USD $703,384.13, comprising the purchase price it had paid for the step 2 and step 3 powder of USD $368,334 plus the ‘profit margin which would have been generated if the product had been supplied in accordance with the contract’ of USD $335,050.13.

The respondent denied that it had breached the Sales Agreement. It said that if the first consignment was non-compliant, it had offered to resend step 2 and step 3 product, and the applicant’s refusal to accept it amounted to a repudiation of the contract.

In accordance with the Sales Agreement, the dispute was referred to arbitration.

The arbitrator directed that the parties plead their respective cases.

The pleadings

In its statement of claim, the applicant alleged that pursuant to the Sales Agreement, the respondent agreed to manufacture and sell 34,560 cans of milk powder at an agreed price.

It alleged that under the Sales Agreement:

(a) the respondent would ship the goods from Melbourne Port to Tianjin Port, China;

(b) a deposit of 50% was payable on signing the Sales Agreement with the balance to be paid ‘within two days after the health certificate and booking confirmation of vessels are issued’;

(c) the respondent ‘was responsible for the manufacture of the goods, the goods quality and shipment of the goods from Australia to Tianjin Port according to Cost, Insurance and Freight shipping agreement’; and

(d) the respondent ‘will ensure that the goods supplied to the Purchaser will confirm to import country standards and be fit for human consumption.’

The applicant then pleaded that in or about the end of July 2017, 52,038 cans of milk powder were detained at Tianjin Port because ‘it was tested as not conforming with the Republic of China’s import standard and accordingly not fit for human consumption’. It alleged that the milk powders were shipped back to Australia by the respondent.

It then pleaded that only 11,244 cans of step 1 product were subsequently shipped to China.

Based on those pleaded facts, the applicant alleged a breach of contract by reason of the respondent’s failure to deliver the goods within the period for delivery provided in the Sales Agreement and because the goods shipped were not fit for human consumption and accordingly did not conform to China’s import country standards.

By way of defence, the respondent pleaded that the step 1 product conformed to import standards, which was evident from tests it had arranged in Australia and China, and that the failed quarantine test in relation to the step 1 product at Tianjin Port was beyond its control. The Chinese authorities would not permit the step 2 and step 3 powder to be separated. After the entire shipment was returned to Australia, the respondent was ready, willing and able to send step 1, step 2 and step 3 powder to China within a reasonable time, but the applicant wrongfully rejected the shipment. The respondent pleaded that in doing so, the applicant repudiated the Sales Agreement, and the respondent counter-claimed damages.

Opening submissions

The applicant provided brief opening submissions in writing. The issues identified by the applicant included whether the respondent had breached the contract by failing to deliver the product into China and whether the respondent could rely on the force majeure clause. The applicant submitted that the respondent, in breach of the contract, did not deliver the product into China ‘with all relevant approvals.’

In its opening submissions the respondent said that it had not failed to deliver the step 2 and step 3 product and, after the product had been returned to Australia, it had offered to reship the product but the applicant repudiated the contract when it refused to accept delivery of further batches.

The hearing

The evidence was by affidavit and there was limited cross-examination at an oral hearing that was appointed for that purpose. The hearing was held on 11 September 2019. The applicant relied on two witnesses: Zonglin Wu and Yuhong Ye. The respondent called one witness: Lisa Xiang Shi.

Zonglin Wu gave evidence that he was a director of the applicant and he signed the Sales Agreement. He said that the applicant purchased products under the Sales Agreement, as detailed in two orders which were consolidated into a single sales order form and invoice on 15 June 2017 — the applicant paid $236,250 in relation to 52,038 cans or sachets. He said that the respondent ‘delivered only 11244 cans/sachets of milk formula powders’ to the applicant, worth USD $101,196.

Yuhong Ye gave evidence explaining why the applicant had refused to accept the reshipment of the step 2 and step 3 product. She said that it did so because the entire shipment had been rejected and there was no guarantee that the Chinese would allow re-entry of the goods and, because of the delay, the use-by date of the product was too short to be viable for resale.

Lisa Xiang Shi deposed that she was a business development manager employed by the respondent, which she founded in 2012 with her husband. She deposed that the respondent manufactures milk powder, including for the Chinese market. She said:

The standards for the People’s Republic of China are called a ‘GB’ … standard. The relevant standard for infant formula is known as GB10765–2010. In summary, the GB standard provides standards on the source materials, vitamin and mineral content and limits on impurities and contaminants.

Ms Shi said that the consigned products were tested before they left Australia and no problem was detected. She said that the products were collected by the applicant’s courier on 20 June 2017 and departed Melbourne by sea on or about 27 June 2017. They arrived at the port of Tianjin on or about 20 July 2017. Meanwhile, on or about 28 June 2017, the respondent sent a sample of the product by air freight to the China Inspection and Quarantine service (‘CIQ’) for testing. On or about 26 July 2017, Ms Shi was advised by a Chinese shipping agent that a test of the step 1 product had revealed the presence of ES. She arranged for a further test to be done in China which did not show the presence of the bacteria.

She said that on or about 6 September 2017, the respondent manufactured and sent replacement step 1 product to China, which was delivered in or about early October. Despite negotiations, CIQ refused to allow the original products to be re-tested, and they were returned to Australia.

The witnesses were briefly cross-examined at the hearing. It is not necessary to refer to that evidence. The arbitrator did not receive oral submissions at the hearing, it having been decided that submissions would be in writing.

The 11 September 2019 email

On 11 September 2019, after the hearing, the arbitrator sent the parties further procedural directions. The email continued:

Otherwise, as foreshadowed, I would be assisted if, in their respective closing submissions, the parties would address the following (this is by no means intended to be exhaustive, or even directive, as to the matters that the parties may wish to address in their submissions):
·Were the step 2 and step 3 products in fact delivered, having regard to the applicable Incoterms (CIF) and paragraph 20 of Ms Shi’s affidavit?
·…

I note that the arbitrator did not explain or elaborate on his reference to ‘Incoterms (CIF)’ in the email. I also note that paragraph [20] of Ms Shi’s affidavit said:

On 20 June 2017 the Products were collected by [the applicant]’s courier. The sea freight shipment of the Products to the People’s Republic of China was arranged by [the applicant].

Closing submissions
Applicant

In its closing submission dated 3 October 2019, the applicant made no reference to the International Chamber of Commerce Incoterms Rules (the ‘Incoterms’) or CIF. In relation to the breach of contract claim, it submitted that cl 5.2 provided that the respondent was responsible for the manufacture of the product and ‘product quality’ and would be responsible for shipping the product to China.

It submitted that the respondent was in breach of the contact because it did not ensure that the product complied with ‘import country standards’ and was in breach of the ‘more general obligation in clause 5.2 to provide product of appropriate quality.’ It went on to say that the step 1 product was rejected because it failed country microbiological standards by containing excessive levels of ES and the Chinese authorities had refused to accept the step 2 and step 3 product because they had been shipped with the step 1 product.

It submitted that the respondent could not rely on the force majeure clause.

In answer to the cross-claim, the applicant submitted that the reshipment of step 1 product was consistent with performance under the contract and it did not claim any losses in respect of the supply of step 1. However, in relation to step 2 and step 3, it submitted that it was the respondent’s obligation to ‘comply with Chinese regulation’.

Respondent

In its closing submissions dated 24 October 2019, the respondent first addressed whether it had failed to deliver the products on time. In answer to that allegation the respondent submitted:

First, under clause 5.2 of the Supply Agreement, ADP was ‘responsible for shipment from ADP to Tianjin Port according to CIF’. Under the lncoterms Rules, ‘CIF’ (or Contract Insurance & Freight) requires the seller to pay for transport of the goods to the named port and deliver the goods, cleared for export, loaded on board the vessel. Risk transfers from the seller to the buyer once the goods have been loaded on board the vessel and the seller’s obligations end when it provides the required documentation (invoice, certificate of insurance and bill of lading) to the buyer. Full Joy has not alleged nor led any evidence that ADP did not comply with these obligations. To the contrary, the evidence shows that ADP complied with its obligations when the Step 2 and Step 3 powder was, after packing and collection from its premises in Melbourne, loaded on board the vessel shortly after 20 June 2017 for delivery to Tianjin Port, where it subsequently arrived shortly before 24 July 2017.

Second, Full Joy has not identified the ‘period for delivery’ required by the Supply Agreement. The Supply Agreement in fact does not specify any express time by which the powder was to be ‘delivered’. Instead, unsurprisingly given that the Supply Agreement specified CIF terms, clause 3 of the Supply Agreement sets out obligations on ADP directed to the timing of production, loading and shipment of the container by ADP. There is no suggestion that ADP did not comply with these timing obligations in producing, loading and shipping the Step 2 and Step 3 powder. It follows that ADP met its contractual obligation of ‘shipment’ of the Step 2 and Step 3 powder on or about 20 June 2017 and Full Joy has not alleged that this was later than the period prescribed by the Supply Agreement.

A footnote in the first of those paragraphs was in the following terms:

see also the common law meaning in New Zealand Pelt Export Company Limited v Trade Indemnity New Zealand Limited [2004] VSCA 163, [55].

I note that there is no evidence in this Court as to what recourse to the specified URL would reveal.

The respondent went on to submit that the Sales Agreement did not specify a time for delivery and that the offer of 25 October 2017 to resupply the product was still within the window available for delivery under the contract.

On the question whether the step 2 and step 3 product was fit for human consumption and conformed to China’s import standards, the respondent submitted that there was no evidence that it did not meet either threshold. Specifically:

(a) there was evidence that it had been tested in Australia and complied with all relevant requirements;

(b) even if the step 2 and step 3 product had contained ES this would not have been fatal because China does not require powder for infants older than 6 months of age to be tested for the bacteria;

(c) in any event, the respondent could resupply compliant product under the contract; and

(d) there was no warranty in the Sales Agreement that the product would successfully pass China’s import quality testing regime.

On 8 November 2019, the applicant served supplementary submissions, addressing a number of matters in response to the respondent’s closing submissions. It did not address the respondent’s reliance on the use of the term ‘CIF’ in the Sales Agreement.

On 14 November 2019, in a written reply to the applicant’s supplementary submissions, the respondent submitted that the applicant had failed to recognise that the respondent’s obligations under the Sales Agreement ‘were according to CIF’. The respondent referred to a passage from the judgment of Nettle JA in New Zealand Pelt Export Company Limited v Trade Indemnity New Zealand Limited (‘New Zealand Pelt’),[3] in which his Honour had observed that in CIF contracts the general rule is that risk passes at the ship’s rail and title passes on hand over of the shipping documents.[4] It submitted that the applicant had failed to prove that the respondent

did not comply with obligations to provide the required documentation to [the applicant] or that the powder was not of the quality required by the contract at the time that it passed the ship’s rail. [The respondent]’s supply obligation referred to in clause 5.2 of the Supply Agreement concluded upon satisfaction of CIF delivery terms.

[3][2004] VSCA 163.

[4]Ibid [55].

On 18 November 2019, the applicant advised the arbitrator that it ‘[had] no further proof to offer, witnesses to be heard or submissions to be made.’ It invited the arbitrator to treat the hearings closed in accordance with art 31(2) of the Resolution Institute Arbitration Rules 2016 (the ‘Rules’).

The arbitrator treated the hearings closed on 16 December 2019.

The Award

In the Award, the arbitrator identified the issues in dispute, which included the following:

(1) Was the Product either:
(a)not in conformance with applicable Chinese import standards or not fit for human consumption; or else
(b)not delivered to the claimant in accordance with the Sales Agreement
such that the respondent breached the Sales Agreement?

(2)If yes to (1), what is the amount of loss and damage suffered by the claimant that was caused by the breach of the Sales Agreement?
…[5]

[5]Award [20].

The arbitrator set out parts of cll 3, 5 and 11.[6] He then observed in relation to cl 5.2 as follows:
[6]Clause 3 and the relevant parts of cl 5 are set out above at [6]. Clause 11 covered termination.

Clause 5.2 of the Sales Agreement provides that ‘the seller will be responsible for shipment from ADP to Tianjin Port according to CIF’. The reference to ‘CIF’ is to the International Chamber of Commerce lncoterms Rule, ‘Cost, Insurance and Freight’. That rule was not put in evidence by either party, however it is publicly available. Relevantly, its terms include:
A4      Delivery [Seller’s obligations]
The seller must deliver the goods either by placing them on board the vessel or by procuring the goods so delivered. In either case, the seller must deliver the goods on the agreed date or within the agreed period and in the manner customary at the port.
B4       Delivery [Buyer’s obligations]
The buyer must take delivery of the goods when they have been delivered as envisaged in A4 and receive them from the carrier at the named port of destination.
A5      Transfer of risks [Seller’s obligations]
The seller bears all risks of loss of or damage to the goods until they have been delivered in accordance with A4, with the exception of loss or damage in the circumstances described in B5.
B5       Transfer of risks [Buyer’s obligations]
The buyer bears all risks of loss of or damage to the goods from the time they have been delivered as envisaged in A4.
… [7]

[7]Award [26] (emphasis in original).

The arbitrator accepted that the Sales Agreement required the respondent to ensure that the product would conform to ‘import country standards’ and be fit for human consumption.[8] He noted the agreement of the parties as to the relevant Chinese import standard (GB 10765–2010). In respect of infant formula (which applied to step 1 formula but not to step 2 or step 3) the relevant standard for the presence of ES was zero per 100 grams (‘0/100g’). He said:

It was common ground between the parties that this requirement was therefore applicable to step 1 powder, but not to step 2 or step 3 powder. In that regard, it is necessary to bear in mind that the claimant makes no claim against the respondent with respect to the step 1 powder, that component of the Product having been replaced by the respondent with a new batch which it manufactured and shipped to Tianjin Port in September/October 2017. Rather, the claimant’s claim relates only to the step 2 and 3 powder.[9]

[8]Ibid [27].

[9]Ibid.

The arbitrator also accepted that a test undertaken by Chinese authorities found ES in the step 1 formula that formed part of the consigned goods. However, he noted that the step 1 formula was replaced by the respondent and subsequently imported into China without incident. He noted that no claim was made in respect of the replacement step 1 product.

In relation to the step 2 and step 3 product, which was therefore the only product in respect of which a claim was made, the arbitrator found against the applicant. He concluded that the applicant had not proven that the goods did not meet China’s import standards or were not fit for human consumption.

In relation to the step 1 product — although it was not necessary for the decision[10] — the arbitrator concluded that the applicant had not discharged its onus of proving that it did not comply with the relevant standard (or that it was otherwise not fit for human consumption).[11] After referring to the evidence that the Chinese authorities had detected ES in the step 1 product, the arbitrator noted the other evidence which cast doubt on the reliability of that test result. He continued:
Be that as it may, as the respondent has observed, its obligations under the Sales Agreement did not include (as they could have done) any warranty that the Product would successfully pass China’s import quality testing regime. Rather, they were concerned with the actual quality of the Product, to be assessed as against the GB10765–2010 standard. The claimant’s claim is with respect to the step 2 and 3 powder (only). Consequently, provided that the step 2 and 3 powder complied with the GB10765–2010 standard, the risk that, nevertheless, the CIQ might not permit it to be removed from Tianjin Port was carried by the claimant. This more so because the Sales Agreement incorporated CIF terms, so that risk with respect to the Product passed to the claimant once it was delivered by being placed on board the vessel, presumably in Melbourne.
It follows that I must find that the claimant has not established that the step 2 and 3 Product in respect of which it makes its claim was not in conformance with applicable Chinese import standards or·not fit for human consumption such that the respondent breached the Sales Agreement.[12]
[10]As noted above, the applicant made no claim in respect of the step 1 product that had been reshipped.
[11]Award [37].
[12]Ibid [38]–[39] (emphasis added).
The arbitrator rejected the applicant’s case that the step 2 and step 3 product had not been delivered in accordance with the Sales Agreement. In that respect, the arbitrator concluded:
Under clause 5.2 of the Sales Agreement, the respondent’s obligations with respect to delivery of the Product were ‘shipment from ADP to Tianjin Port according to CIF’. In accordance with the CIF rules, that obligation was to ‘deliver the goods either by placing them on board the vessel or by procuring the goods so delivered.’
It was not in issue that the Product was delivered by the respondent on board the vessel by which it was shipped to Tianjin Port. Accordingly, the claimant’s claim that the step 2 and 3 powder was not delivered in accordance with the requirements of the Sales Agreement must fail.[13]
Applicant’s submissions in this Court
[13]Ibid [41]–[42] (emphasis added).

In this Court, the applicant submits that it was denied a reasonable opportunity to present its case and the Award was in conflict with public policy, with the result that the Award should be set aside.

It relies on s 34(2)(a)(ii) of the Act which relevantly provides that an award may be set aside by the Court if the moving party furnishes proof that it was not given proper notice of the arbitration ‘or was otherwise unable to present the party’s case’.

Specifically, the applicant submits that the arbitrator relied on the meaning of the term ‘CIF’ in cl 5.2 of the Sales Agreement as relevant to the applicant’s claim, in circumstances where it had not been pleaded or argued by the parties before it was raised ‘obliquely’ by the arbitrator after the oral hearing and before final written submissions were provided.

It submits that the meaning or purported significance of the term ‘CIF’ was not pleaded by either party, referred to in the affidavits and the Incoterms were not adduced into evidence. It describes the arbitrator’s reference in the email of 11 September 2019 as ‘an afterthought brought up in a cursory and belated manner by the Arbitrator on his own initiative.’

It submits that the respondent’s reliance, in its written submissions, on the reference to ‘CIF’ in cl 5.2 lacked an evidentiary foundation and that ‘it was not incumbent upon [the applicant] to respond to [the respondent]’s belated submissions unsupported by any evidence.’

It submits that the arbitrator fundamentally breached the requirements of procedural fairness by going outside the four corners of the arbitral process and evidence, and did not inform the parties that he would make critical adverse findings on the basis of material that was not in evidence. It submits that, despite art 27(4) of the Rules, which contemplated that the parties would adduce evidence in support of their case:

In effect, the Arbitrator went off on a frolic of his own to build an evidentiary case in support of an issue which he himself had raised belatedly and in respect of which [the respondent] then sought to make submissions at the Arbitrator’s behest.

It submits that ‘a party in [its] position could not reasonably have foreseen that the Arbitrator would proceed to determine critical claims by recourse to materials that were not in evidence.’ It says that had it been on notice it could have addressed the following:

a.CIF was not a reference to the Incoterms Rule;
b.‘risk’ in the lncoterms referred to by the Arbitrator referred to risk of loss or damage to the product while in transit, rather than risk that the product would be rejected by the China Inspection and Quarantine Authority;
c.the respondent bore the risk of the produce being rejected under cl 5.8 of the Sales Agreement which obliged the seller to ‘ensure’ that the products ‘will conform to import country standards, and be fit for human consumption’;
d.the words ‘The seller is responsible for the manufacture of the products and product quality; the seller will be responsible for shipment from ADP to Tianjin Port according to CIF, but the buyer will take charge the cost of health certificate and certificate of origin’ meant that the respondent was responsible for paying for cost, insurance and freight, whereas the applicant was only responsible for paying for health certificates and certificates of origin;
e.that interpretation would have been more consistent with how the balance of the Sales Agreement was expressed, particularly the last clause of cl 5.2 which stated ‘but the buyer will take charge the cost of health certificate and certificate of origin’ and the first clause ‘The seller is responsible ... for product quality ... ’.
f.the Arbitrator’s construction of the lncoterms overlooked the first and last part of cl 5.2 and read the lncoterms in isolation rather than in the context of the words of the Sales Agreement.

It submits that had it been on notice that the arbitrator would rely on the ‘extraneous “Incoterms Rule”, there is a realistic prospect that the Award may have differed in a material respect’.

In its reply submissions, the applicant submits that by referring to the Incoterms after the close of evidence, the arbitrator in effect ‘re-opened’ the case in circumstances that did not fall within the well-established grounds on which a party may reopen its case after the close of evidence.[14]
[14]Referring to Spotlight Pty Ltd v NCON Australia Ltd (2012) 46 VR 1, 7 [25]–[26] (Harper and Tate JJA and Beach AJA); [2012] VSCA 232, citing Kenny J in Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22.

The applicant also relies on s 34(2)(b)(ii) of the Act, which provides that ‘the award is in conflict with the public policy of this State.’ In doing so, it makes the same substantive complaint.

Respondent’s submissions in this Court

The respondent submits that the potential significance of the reference to ‘CIF’ in the Sales Agreement, and the definition provided by the Incoterms, were raised by the arbitrator, and the applicant was given ample opportunity to deal with the significance of the contract being a CIF contract. Specifically:

(a) by the email of 11 September 2019, the arbitrator asked the parties to address whether the step 2 and 3 product were in fact delivered ‘having regard to the applicable Incoterms (CIF)’;

(b) the respondent relied on and summarised the meaning of ‘CIF’ from the Incoterms in its closing submissions of 24 October 2019[15] and its reply submissions of 14 November 2019;[16] and

(c) given that the use of the Incoterms was both foreshadowed by the arbitrator and addressed by the respondent, the arbitrator’s consideration of the Incoterms could not have surprised the applicant.

[15]See [38]–[39] above.

[16]See [44] above.

The respondent submits that a reasonable litigant in the position of the applicant would have provided responsive submissions and the applicant must have made a strategic decision not to provide any response.

It submits that:

… there was nothing inappropriate about the arbitrator obtaining for himself a copy of the Incoterms Rules from publicly available sources in circumstances where the content of the Incoterms Rules had been referred to in [the respondent]’s closing submissions, their content was well-known and uncontroversial, and neither party had suggested to the arbitrator that the Incoterms Rules were not relevant or were something to which he should not refer.

Finally, it submits that even if the applicant’s case were otherwise accepted, any further or greater opportunity for it to address the meaning of ‘CIF’ and its application to the contract would not have made any difference to the outcome.

Applicable statutory context and principles

The arbitrator directed, with the consent of the parties, that the arbitration would be governed by the Rules. The applicant points to the following:

(a) art 17.1 of the Rules stated, inter alia, that ‘Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting its case’;

(b) arts 20 to 22 of the Rules provided for the exchange of pleadings and amended pleadings by the parties; and

(c) art 27 stated:

1.Each party shall have the burden of proving the facts relied on to support its claim or defence.
2.Witnesses, including expert witnesses, who are presented by the parties to testify to the arbitral tribunal on any issue of fact or expertise may be any individual, notwithstanding that the individual is a party to the arbitration or in any way related to a party. Unless otherwise directed by the arbitral tribunal, statements by witnesses, including expert witnesses, may be presented in writing and signed by them.
3.At any time during the arbitral proceedings the arbitral tribunal may require the parties to produce documents, exhibits or other evidence within such a period of time as the arbitral tribunal shall determine.
4.Rules of evidence do not apply. The arbitral tribunal shall determine the admissibility, relevance, materiality and weight of the evidence offered.

Section 18 of the Act requires the arbitral tribunal to treat the parties equally and allow each a reasonable opportunity to present its case. As noted above, s 34 of the Act provides that the Court may set aside an award if the moving party furnishes proof that it was unable to present its case or if the Court finds that the award is in conflict with the public policy of the State.

In Mango Boulevard Pty Ltd v Mio Art Pty Ltd,[17] the Queensland Court of Appeal explained that a party is entitled to a reasonable opportunity to present its case, which involves questions of fact and degree, and it is not about ensuring that the party takes best advantage of the opportunities presented. Picking up a judgment of Croft J in this Court,[18] Morrison JA said:

What is required in terms of a reasonable opportunity to present the case is a question of fact and degree, and it is not intended to protect a party from its own failures or strategic choices, as was said in Amasya.
‘In my view, the words “reasonable” and “full” as they are used in s 18 of the Act and art 18 of the Model Law respectively impose the same standard. What is required is that the arbitral process be fair and that each party be given a reasonable opportunity to present its case. This position is consistent with what was said by the Hong Kong Court of Appeal in Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) — namely that the term “full opportunity” in art 18 of the Model Law “cannot mean that a party is entitled to present any case it pleases, any time it pleases, no matter how long the presentation should take.” This position is made express in s 18C of the International Act which provides that, for the purposes of art 18 of the Model Law, a party is “taken to have been given a full opportunity to present the party’s case if the party is given a reasonable opportunity to present the party’s case.”

The purpose of the requirement in art 18 of the Model Law is as stated by the Ontario Superior Court of Justice in Corporacion Transnacional de Inversiones SA de CV v STET International SpA: “The purpose of art 18 is to protect a party from egregious and injudicious conduct by … [an arbitral tribunal]. It is not intended to protect a party from its own failures or strategic choices.”’[19]

[17][2018] QCA 39 (‘Mango Boulevard’).

[18]Amasya Enterprises Pty Ltd v Asta Developments (Aust) Pty Ltd [2016] VSC 326, [28]–[29] (Croft J) (‘Amasya’) (citations omitted).

[19]Mango Boulevard [2018] QCA 39, [83].

A complaint that a party has not had a reasonable opportunity to present its case is not demonstrated by the making of an erroneous finding on the evidence, even one of an egregious kind. As the Court of Appeal emphasised in Sauber Motorsport AG v Giedo van der Garde BV,[20] unfairness in any particular case will depend upon context, and all the circumstances of the case.[21]
[20][2015] VSCA 37.
[21]Ibid [8] (Whelan, Beach and Ferguson JJA).

It is necessary for the applicant to establish ‘real unfairness or real practical injustice in how the [arbitration] was conducted or resolved, by reference to established principles of natural justice or procedural fairness.’[22]
[22]TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361, 376–7 [55] (Allsop CJ, Middleton and Foster JJ); [2014] FCAFC 83 (‘TCL’).

Although TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd[23] concerned an international arbitration, the relevant principles can be applied with equal force to a domestic arbitration under the Act.[24] As analysed by the Full Court, there is an overlap between the natural justice obligations reflected in the arbitrator’s obligation to allow a party a reasonable opportunity to present its case and the requirement that the award not offend the public policy of the State. That is because it is a cardinal principle that where there is an exercise of adjudicative power, be it curial or arbitral, the process must be fair and impartial and involve equal treatment of the parties.[25]
[23]Ibid.
[24]There is a close correlation, in text and purpose, between arts 34 and 36 of the UNCITRAL Model Law on International Commercial Arbitration (set out in TCL at [62]) and ss 34 and 36 of the Act.
[25]TCL (2014) 232 FCR 361, 383 [73], 384–5 [76] (Allsop CJ, Middleton and Foster JJ); [2014] FCAFC 83.

TCL concerned the question whether a decision made without probative evidence amounted to a denial of procedural fairness. The Court accepted that a decision that is lacking a factual foundation, may, but need not, amount to a breach of natural justice. The touchstone of the latter is the demonstration of real practical injustice or real unfairness in the making of the award.[26] The Court said:

If a party can demonstrate that it has been, in essence, denied the opportunity to be heard on an important and material issue as revealed by such a finding made without material, real unfairness or real practical injustice may be shown.[27]

[26]Ibid 394–5 [111]–[112].

[27]Ibid 395 [113].

In TCL, the Full Court accepted as ‘helpful … but not determinative’ the following list of general principles distilled by Fisher J in Trustees of Rotoaira Forest Trust v Attorney-General:[28]
[28]Ibid 400 [141].

(a)Arbitrators must observe the requirements of natural justice and treat each party equally.
(b)The detailed demands of natural justice in a given case turn on a proper construction of the particular agreement to arbitrate, the nature of the dispute, and any inferences properly to be drawn from the appointment of arbitrators known to have special expertise.
(c)As a minimum each party must be given a full opportunity to present its case.
(d)In the absence of express or implied provisions to the contrary, it will also be necessary that each party be given an opportunity to understand, test and rebut its opponent’s case; that there be a hearing of which there is reasonable notice; that the parties and their advisers have the opportunity to be present throughout the hearing; and that each party be given reasonable opportunity to present evidence and argument in support of its own case, test its opponent’s case in cross-examination, and rebut adverse evidence and argument.
(e)In the absence of express or implied agreement to the contrary, the arbitrator will normally be precluded from taking into account evidence or argument extraneous to the hearing without giving the parties further notice and the opportunity to respond.
(f)The last principle extends to the arbitrator’s own opinions and ideas if these were not reasonably foreseeable as potential corollaries of those opinions and ideas which were expressly traversed during the hearing.
(g)On the other hand, an arbitrator is not bound to slavishly adopt the position advocated by one party or the other. It will usually be no cause for surprise that arbitrators make their own assessments of evidentiary weight and credibility, pick and choose between different aspects of an expert’s evidence, reshuffle the way in which different concepts have been combined, make their own value judgments between the extremes presented, and exercise reasonable latitude in drawing their own conclusions from the material presented.
(h)Nor is an arbitrator under any general obligation to disclose what he is minded to decide so that the parties may have a further opportunity of criticising his mental processes before he finally commits himself.
(i)It follows from these principles that when it comes to ideas rather than facts, the overriding task for the plaintiff is to show that a reasonable litigant in his shoes would not have foreseen the possibility of reasoning of the type revealed in the award, and further that with adequate notice it might have been possible to persuade the arbitrator to a different result.
(j)Once it is shown that there was significant surprise it will usually be reasonable to assume procedural prejudice in the absence of indications to the contrary.[29]

[29][1999] 2 NZLR 452, 463.

It emerges from that catalogue that where an issue is obvious or reasonably foreseeable, the arbitrator is entitled to proceed on the understanding that the parties will be alive to the issue and make strategic and tactical decisions as to which items to focus on, and which items to let pass by, in aid of their overall aim in the arbitration.

An arbitrator is not precluded from addressing an issue not raised by the parties, but the parties must first be given an opportunity to deal with it. That may require the arbitrator to not only draw the issue to the attention of the parties, but also to provide an explanation as to why it is, or may be, relevant to the decision. This latter explanation is unlikely to be required if one of the parties has taken up the issue and addressed its relevance. This does not mean that the process is endlessly iterative with the arbitrator in effect required to engage in a constant back and forth with the parties as issues come to the fore or recede in the mind of the arbitrator along the way to a decision.

However, as the High Court said in a different context in, a person whose interest is apt to be affected by a decision should be put on notice of ‘the nature and content of information that the repository of power undertaking the inquiry might take into account as a reason for coming to a conclusion adverse to the person.’[30]
[30]Minister for Immigration and Border Protection v SZSSJ (2016) 259 CLR 180, 207 [83] (French CJ, Kiefel, Bell, Gageler, Keane, Nettle and Gordon JJ); [2016] HCA 29 (citations omitted).

Consideration

The pleadings and the statement of issues to be resolved, referred to by the arbitrator in the Award, identified the central issues in the dispute as whether the product was delivered in accordance with the Sales Agreement, met Chinese import standards and was fit for human consumption.

It is first necessary to recall how the arbitrator employed the reference to ‘CIF’ and the Incoterms in the Award in relation to these issues.

As noted, the arbitrator found that, notwithstanding that CIQ found ES in the step 1 product, the applicant had not established that the step 2 and step 3 product (the only product that was the subject of the claim) failed to comply with applicable Chinese import standards. He also added, parenthetically, that the applicant had not established that the step 1 product was non-compliant or otherwise not fit for human consumption. That was because the tests undertaken before the product left Australia and after it arrived in China, which did not reveal the presence of the bacteria, meant that the arbitrator was not satisfied on the basis of the CIQ result alone that the step 1 product breached the relevant import standard.

The arbitrator also found the risk that the Chinese authorities would find the product non-compliant was not a risk borne by the respondent under the Sales Agreement. Accordingly, the arbitrator found that the respondent’s contractual obligation was to supply compliant product, rather than a product that passed applicable Chinese import standards. In that respect, the arbitrator took into account his understanding that the Sales Agreement was a CIF contract under which ‘that risk with respect to the Product passed to the claimant once it was delivered by being placed on board the vessel, presumably in Melbourne.’[31]
[31]Award [38].

On the other question in issue, namely, whether the respondent had delivered the product under the Sales Agreement, the arbitrator construed the contract by reference to the Incoterms definition of ‘CIF’ as requiring no more than to ‘deliver the goods either by placing them on board the vessel or by procuring the goods so delivered.’[32]
[32]Ibid [41].

The issue for this Court is not whether the arbitrator was correct to construe the contract in that way and whether the use of the term ‘CIF’ in the Sales Agreement had the effect he attributed to it. The question is whether the applicant was given a reasonable opportunity to deal with the case that ultimately found favour. That gives rise to three issues:

(a) whether it was open to the arbitrator, consistently with obligations of fairness, to raise the meaning of ‘CIF’ by reference to the Incoterms in the way that he did;

(b) whether the respondent’s closing submissions were within the legitimate scope of the arbitration, as defined by the parties, and whether the applicant had a reasonable opportunity to deal with the respondent’s submission; and

(c) whether the arbitrator’s Award went beyond the scope of the respondent’s submissions.

The 11 September 2019 email

The first point is whether it was open to the arbitrator to raise ‘Incoterms (CIF)’ as a potential issue in his email of 11 September 2019.

There are two reasons why the arbitrator’s email did not interfere with the fair presentation of argument. First, the role of an arbitrator is not entirely passive. Subject to questions of fairness, the arbitrator was entitled to refine and define the issues that he considered arose.

The potential operation of cl 5.2, with its reference to ‘CIF’, was obvious and it was reasonable for the arbitrator to seek submissions on it. In order to resolve the dispute, the arbitrator was required to construe and apply the Sales Agreement. In part, that required consideration of what obligations were imposed on the respondent with respect to the delivery and quality of the product. Both cl 5.2 and the table which identified the products referred to ‘CIF’. Clause 5.2 provided that the respondent was ‘responsible for … shipment from [the respondent] to Tianjin Port according to CIF’. In order to understand the clause, which might reasonably be thought to bear centrally on the claim in relation to delivery, it was entirely appropriate for the arbitrator to seek submissions on whether the step 2 and step 3 product was delivered, ‘having regard to the applicable Incoterms (CIF)’.

The arbitrator appears to have assumed that the term ‘CIF’ was a reference to it as defined in the Incoterms. Whether or not he was correct to do so is beside the point. As explained below, the adoption of the Incoterms definition was by no means irrational or unlikely. Having identified a term of the contract which he perceived to be relevant he sought submissions on it. That this was a course open to him is reinforced by s 28(5) of the Act. Section 28(5) of the Act provides that the tribunal must decide the dispute in accordance with the terms of the contract, taking into account the usages of trade applicable to the transaction.

It is necessary to say something about CIF terms.

Unsurprisingly, there are, in international trade, often used and well understood terms that describe ancillary or facultative aspects of the transaction. Two types of sale contracts, which the Full Court of the Federal Court has described as ‘notorious’, are ‘CIF’ and ‘FOB’.[33] The former is an acronym for ‘Cost, Insurance and Freight’ and the latter ‘Free on Board’.
[33]Glencore Coal Assets Australia Pty Ltd v Australian Competition Tribunal [2020] FCAFC 145, [129] (Allsop CJ, Beach and Colvin JJ).

Although it has been said that a ‘true’ CIF contract is ‘a comparative commercial rarity’,[34] the essential features of such a contract are well understood. Essentially, it centres around the point at which responsibility or risk for the goods passes. Title usually passes by the handing over a bill of lading.
[34]The Albazero [1977] AC 774, 809 (Brandon J), which was approved on appeal at [1977] AC 774, 840.

The term was explained by the High Court in Plaimar Ltd v Waters Trading Co Ltd:[35]

A contract for the sale of goods upon c.i.f. terms places upon the seller an obligation to ship goods of the contract description to a destination, from a port and at a time indicated by the contract, to obtain a proper bill of lading and a customary insurance covering the ocean transit, to make out an invoice for the price showing what sum, if any, the consignee must pay for freight and giving the buyer credit for the amount, and, as soon as reasonably practicable, to tender these documents to the buyer in exchange for payment of the amount shown on the invoice, or acceptance of a bill of exchange therefor, as the contract may provide. [36]

[35](1945) 72 CLR 304; [1945] HCA 34 (‘Plaimar’).

[36]Ibid 311 (Rich, Dixon and McTiernan JJ).

Under a CIF contract, ‘the general rule is that risk passes at the ship’s rail’.[37] Under such a contract, the seller will arrange both insurance and freight and the buyer pays the price for the goods as shipped. As explained by the Full Court of the Federal Court in Glencore Coal Assets Australia Pty Ltd v Australian Competition Tribunal,[38] the responsibility of the seller to arrange carriage and insurance requires the seller to enter both the insurance and the freight markets.[39] In Glencore, the Full Court noted the differences between CIF and FOB contracts and the different risks that are covered by each. With the latter, both risk and title pass at the ship’s rail and the seller’s responsibility is simply to place the goods on board the ship.[40]
[37]New Zealand Pelt [2004] VSCA 163, [55] (Nettle JA, Ormiston JA and Hansen AJA agreeing) (citations omitted).
[38][2020] FCAFC 145 (‘Glencore’).
[39]Ibid [130] (Allsop CJ, Beach and Colvin JJ).
[40]Ibid [131].

To illustrate the different meanings, the Full Court referred to the Incoterms, which defined and described FOB and CIF contracts as follows:

FOB – Free on Board
‘Free On Board’ means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
CIF – Cost, Insurance and Freight
‘Cost, Insurance and Freight’ means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.[41]

[41]Ibid [133].

Those definitions reflect, in general terms, the well understood meaning attributed to the terms ‘FOB’ and ‘CIF’. Of course, how they are used in a particular contract will depend on the terms of the contract. But it is relevant to know that there are generally understood meanings that are regularly used in trade.

In my view, it was entirely reasonable for the arbitrator to raise the potential operation of the term ‘CIF’ and to refer to the standard definition provided by the Incoterms.

Notably, the applicant did not make any submissions to the arbitrator that it was improper for the arbitrator to raise this issue or that the reference to ‘CIF’ in the Sales Agreement was irrelevant to the issues to be decided. The applicant remained silent on that topic. If, as it now contends, it viewed the invitation for submissions as inappropriate, it had the opportunity to say so.

Second, I do not think that it was too late for the arbitrator to raise the matter in the email of 11 September 2019. It is to be noted that at the oral hearing, only evidence was adduced, and no submissions were advanced. It was the expectation that written submissions would be made after the oral hearing. This is what occurred. Although the email came after the hearing, it was forwarded to the parties in advance of, and to assist them in the preparation of, their written submissions. The arbitration itself did not close for some months after the email was sent.

I also do not accept that by sending the email, the arbitrator impermissibly permitted the reopening of the case. Those principles are not apt to address what occurred.

Had the arbitrator referred to the decision of the High Court in Plaimar, the Court of Appeal in New Zealand Pelt or the Full Court of the Federal Court in Glencore, it is difficult to see that this would have impermissibly involved reopening the case. As well, the Rules of the arbitration provided that the rules of evidence did not apply.

I am unable to accept that the applicant was not able to respond to the arbitrator’s email by submitting that the reference to ‘CIF’ in the Sales Agreement did not incorporate the definition in the Incoterms or to proffer an alternative construction. At that point, the arbitrator was not indicating any view as to the significance of the reference to ‘CIF’ or a settled meaning of that term as it was used in the Sales Agreement. He was simply inviting the parties to address the issue. In my view, he was not precluded from doing so. There was no unfairness or breach of the obligation to provide a fair hearing in doing so.

The respondent’s submissions

The second issue is whether, the issue having been raised, the applicant had a reasonable opportunity to deal with it, insofar as the respondent sought to rely on it. Fairly clearly, the respondent sought to make something of the reference to ‘CIF’.

I have already referred to the respondent’s closing submissions above. It is not necessary to repeat what was said. It is true that the respondent did not seek to tender a copy of the Incoterms and did not extract them verbatim in its written submissions. However, insofar as the Incoterms deal with the timing of the passing of risk in a CIF contract, the submissions paraphrased them. For relevant purposes, the applicant did not identify any distinction between the text of the Incoterms and the content of the respondent’s submission.

In my view, there was nothing unfair in the respondent relying on its understanding of the reference to ‘CIF’ based on the Incoterms. The applicant was given a reasonable opportunity to respond to the respondent’s submissions.

Did the arbitrator go beyond the submissions?

The third and final aspect to consider, is whether the Award went beyond the bounds marked out by the pleadings and submissions, and the arbitrator decided the case on the basis of material that was not in evidence. I have already explained how I understand the arbitrator to have relied on the reference to ‘CIF’ in cl 5.2.

The clause was relevant to the question whether the product was delivered in accordance with the Sales Agreement. Self-evidently, that issue required consideration of the terms of the Sales Agreement. The respondent relied on cl 5.2 for that purpose.

The arbitrator addressed the Incoterms in a number of paragraphs and set them out in paragraph [26]. The applicant submits that this involved an impermissible adducing of evidence by the arbitrator, after the close of case, and meant that the decision went beyond the evidence.

In its oral submissions, the applicant focused on the fact that the Incoterms were not in evidence. Given that the arbitrator was not bound by the rules of evidence, and was bound by s 28(5) of the Act to decide the dispute in accordance with the Sales Agreement and consider the usages of the trade concerned, I do not regard the fact that the Incoterms were not formally proved as significant. The real issue is whether it was, in practical terms, unfair for the arbitrator to retrieve the Incoterms after the parties had concluded their evidence and submissions. In circumstances where the arbitrator was not bound by the rules of evidence, the formal proof of the terms of the Incoterms was not required.

I do not consider that the use of the Incoterms in the Award involved any unfairness to the parties. It was not suggested that the Incoterms were unavailable to the applicant, difficult to locate, or of uncertain content. There was no evidence filed in this Court that the applicant was not able to discern what was meant by the term ‘CIF’. Apart from the fact that the terms were not in evidence, the applicant did not submit that the text of the Incoterms came as a surprise to it. In my view, the Incoterms in the form used by the arbitrator do not go beyond the well understood meaning of the term ‘CIF’ as explained by Nettle JA in New Zealand Pelt, to which the respondent had referred in its submissions. Of course, whether the contract used the term ‘CIF’ in that way was a different question. However, that was a question which the arbitrator implicitly raised for consideration in his email of 11 September 2019.

In the circumstances, it could have come as no surprise to the applicant that the arbitrator might treat the meaning of ‘CIF’ by reference to the Incoterms as relevant to the issues he had to decide. The fact that he sourced the text himself, and did not give the parties an opportunity to comment on the version he chose, did not render the process unfair. The issue was squarely raised, the respondent had paraphrased the content of the Incoterms meaning of ‘CIF’, and the actual text of the Incoterms did not involve any new issue or departure from the way the respondent had run its case as revealed in its final submissions. The applicant did not submit that it was unable to source the Incoterms or that the definition used by the arbitrator, whatever its source, departed from the well understood meaning of the term ‘CIF’.

The arbitrator also relied on the reference to ‘CIF’ in cl 5.2, and the Incoterms meaning of that term, in relation to whether the Sales Agreement required the product to objectively meet Chinese import standards or whether it required it to clear China’s import quality testing regime. In my view, the arbitrator was entitled to rely on cl 5.2 in that context, in the sense that it was not unfair of him to do so. The issue was how the contract should be construed. Did it require the product to pass through import controls or, alternatively, objectively meet import standards? There is the potential to be a significant practical difference between those different constructions. Whether the product contained bacteria of a prohibited kind was a matter that could be tested and determined objectively. Although it might be thought that testing would yield the same result, if undertaken by independent analysis or by government authorities, that might not always be so. Similarly, even in what appears to be an objective standard, there may be differences in opinion.

The meaning of the Sales Agreement fell to be determined by the text in its commercial context.[42] The respondent clearly advanced the submission that the contract contained no warranty that the products would be acceptable to Chinese authorities and pass through import controls. As the arbitrator noted, the contract did not contain an express warranty to that effect. Part of the context relied on by the arbitrator was the use of the term ‘CIF’ in cl 5.2 of the contract, which he understood to embrace the Incoterms meaning, and that the applicant bore the cost of the health certificate and certificate of origin.
[42]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37.

In my opinion, there was no unfairness in the arbitrator defining cl 5.2 by reference to the Incoterms and using it as relevant to the construction of the agreement. Again, whether he was correct to do so, as a matter of construction, is not to the point. The meaning and the potential significance of the reference to ‘CIF’ in cl 5.2 was in the ring.

It is important to recall that the applicant chose not to assist the arbitrator with a topic on which he sought submissions. The applicant had the opportunity to make submissions on each of the matters, which it now says it could have raised, before the hearing closed. That it failed to do so was not because the process was unfair. Responsibility for that omission rests with the applicant alone.

Conclusion

Although I have considered whether there was any unfairness from the three angles discussed above, I have also considered whether, taken as a whole, the arbitrator did not give the applicant a reasonable opportunity to present its case.

In my view, it was reasonable for the arbitrator to seek submissions on whether the step 2 and step 3 product was delivered, ‘having regard to the applicable Incoterms (CIF)’, and the use that the arbitrator made of the Incoterms was well on the cards. The applicant stayed mute on the issue even though it had received the arbitrator’s email of 11 September 2019, and the respondent’s two sets of submissions, which raised the issue. There was no reason why the applicant could not have advanced the submissions that it now says it was precluded from making.

The fact that the arbitrator sourced the text of the Incoterms himself was not unfair given that he had referred to the terms, sought submissions in relation to them and the respondent had paraphrased them in its submissions.

The applicant’s submission that it was not incumbent on it to make submissions in response to the arbitrator’s invitation can be accepted. There was no obligation for it to do so. And no obligation on the arbitrator to ensure that the applicant made submissions on the point. The issue is whether the applicant had a reasonable opportunity to present its case, not whether it took best advantage of the opportunities afforded to it. I am satisfied that there was no unfairness, and the applicant has not demonstrated that it was unable to present its case or that the Award was against the public policy of the State.

The proceeding must be dismissed.

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[2020] VSC 672

13 October 2020